Ch 9 Assessing the Risk of Material Misstatement

• Risk of Material Misstatements at the Assertion Level Susceptibility of an assertion to material misstatement.

1. Inherent risk-

Risk assessment procedures include the following: 1. ________ of management and _______ within the entity 2. _________ procedures 3. ___________ and __________ 4. Discussion among ________ ________ _________ 5. ______ ______ _______ procedures

1. Inquiries of management and others within the entity 2. Analytical procedures 3. Observation and inspection 4. Discussion among engagement team members 5. Other risk assessment procedures

In addition to *modifying audit evidence*, the auditor can also make the following changes to respond to risks: 1. The engagement may require _________ . 2. The engagement will be reviewed _____ ______ than usual

1. The engagement may require more experienced staff. 2. The engagement will be reviewed more carefully than usual

Auditors must decide _________ acceptable audit risk. Auditors must first decide ______ risk and use it to modify acceptable audit risk.

1. appropriate 2. engagement

Inquires of *internal audit personal* may show valuable information about the __1__ and ___2____ of internal controls.

1. design 2. operating effectiveness

The auditor must assess the ____1__ that make up the risk and modify _____2__ for audit evidence to take them into consideration.

1. factors 2. procedures

• Risk of Material Misstatement at the Overall Financial Statement Level: Refers to the risks that relate ____1______to the ____2_____ and potentially affect a number of ___3____

1. pervasively 2. financial statements as a whole 3. different transactions and accounts.

Consideration takes place during the ___1___ phase and is updated _____2___the audit process.

1. planning 2. throughout

To obtain an understanding of the entity the auditor performs __1__ procedures to figure out if there is __2___ in the material misstatement or ___3__.

1. risk assessment 2. error 3. fraud

The auditor respond to risk by changing the extent of ___1___ and __2___

1. testing 2. audit procedures

Those charged with governance such as ____1___ or __2__ may also provide insight of *client business risk*.

1. the Board of Directors 2. audit committee

Auditing standards require the auditor to obtain an understanding of the __1__and its environment including its __2__ to assess the risk of __3__ in the clients financial statements.

1.entity 2. internal control 3. material misstatements

• Risk of Material Misstatements at the Assertion Level - Risk that internal controls will not prevent or detect material misstatement.

2. Control Risk

Significant risk represents unidentified in accessories of MM that in the auditor's professional judgment requires and unusual list.

?

when auditor identify a material misstatement due to fraud auditing standards required and auditor to require this as a significant risk.

???

• Inherent Risk Before considering the effectiveness of related Internal controls such assessments are based on the discussions with ______ about the knowledge of the company and results in audits of ________

Before considering the effectiveness of related Internal controls such assessments are based on the discussions with management the knowledge of the company and results in audits of previous years

_________ risk is the risk that the auditor (or firm) will suffer harm after the audit is finished, even though the report was correct.

Engagement

What are the are two components at the assertion level?

Inherent risk and control risk

_________ is a measure of magnitude or size

Materiality

Which types of audit evidences provide auditors with a basis for understanding internal control.

Observation and inspection

AAR has a Direct relationship with?

PDR

CR has a indirect relationship with?

PDR

AAR has a Indirect relationship with?

Planned audit evidence

CR has a direct relationship with?

Planned audit evidence

________ is a measure of uncertainty

Risk

Risk shows up at what two levels?

Risk of material misstatement at the overall financial level and risk of material misstatement at the assertion level.

Auditing standards require the auditor to assess the risk of material misstatements at the _____level.

assertion

Engagement risk is closely related to ______ risk because the risk that the auditor will be sued is often related to business failure after the audit is finished.

client business

One major limitation in the application of the *audit risk model* is the difficulty of measuring the ________ of the model.

components

Auditors develop various types of ____ _____ to help link judgments affecting audit evidence with appropriate evidence to accumulate.

decision aids

If the auditor finds a risk the auditor must _____ in the working paper.

document his or her conclusions

The risk of material misstatement, control risk, and inherent risk are assessed for each audit objective in ___ _____ of the audit.

each segment

Discussion among key team members including ______ how and where the financial statements may be hit by fraud or MM.

engagement partner

• Account balances or transactions that require _____ for which *significant measurement uncertainty* exists also may require more attention.

estimates

*Others within the entity* may have ______ _______ to assist the auditor in identify the material misstatement

important information

Assessing ______ risk is an attempt by the auditor to predict where misstatements are most and least likely in the financial statement segments.

inherent

Although it is common to assess _____ and ____ risk for each *balance-related audit objective*, it is not common to allocate ______ to those objectives.

inherent and control materiality

PCAOB requires the auditor to _____ about risk of material misstatement?

inquire?

o If a client has questionable integrity the auditor is likely to assess a (lower/higher) AAR

lower

Factors Affecting Acceptable Audit Risk: • *The degree to which external users rely on the statements* based on these factors: o _______ size o Distribution of _______ o _____ and amount of ______

o Client size o Distribution of ownership o Nature and amount of liabilities

• The likelihood that a client will have financial difficulties after the audit based on these factors: o _______ position o Profits (losses) in ____ o Method of financing _____ o Nature of the client's ______ o Competence of ______

o Liquidity position o Profits (losses) in previous years o Method of financing growth o Nature of the client's operations o Competence of management

auditor understanding by talking to _________ about their insight of the _____ audits.

past auditor past

the Audit risk model is primarily a _____ model and is of limited use in evaluating _____.

planning results

• *Nonroutine transactions,* including _______, often represent significant risk.

related-party transactions

Because several high-profile cases of financial statement fraud involve misstatements in ________, auditing standards require the auditor to presume that risks of fraud exist in ________

revenue recognition revenue recognition.

Auditors accept some level of ___ or ___ in performing audits.

risk or uncertainty

A _______ risk is any risk that the auditor deems to require special attention

significant

All fraud risks are normally considered to be ______ risk

significant

Auditor must determine whether any of the risks identified are a ______ risk.

significant

The performance of *analytical procedures* may help the auditor identify _______ or ______

unusual amounts or transactions.

How willing the auditor is to accept that the financial statements may be misstated after the audit is complete and an unmodified opinion has been issued.

• Acceptable Audit Risk:

The auditor's assessment of the risk that a material misstatement could occur in an assertion and not be prevented or detected by the client's internal controls.

• Control Risk:

The auditor's assessment of the susceptibility of an assertion to material misstatement.

• Inherent Risk

Which risk is dependent on the other three factors in the model and will change only if the auditor changes one of the other factors.

• Planned Detection Risk:

the risk that the audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality.

• Planned Detection Risk: